HKMA set to help banks in offshore renminbi squeeze

Bank of China Hong Kong’s announcement that it is halting renminbi trade settlement service in Hong Kong should not badly squeeze on renminbi liquidity because the city’s central bank can tap a swap line, strategists believe.

The Hong Kong Monetary Authority (HKMA) looks set to help alleviate the shortage of offshore renminbi in Hong Kong via its currency swap line with China, but speculation on the currency in the city looks likely to collapse in the short term.

The lack of liquidity of the renminbi in Hong Kong is down to the Bank of China Hong Kong (BoCHK), the designated renminbi trade settlement clearing bank in Hong Kong. It said on October 28 that the Rmb8 billion (US$1.19 billion) it had set aside for the settlement had been reached and that further trade settlement offshore could not be provided for the remainder of the year.

BoCHK is the officially designated settlement agent between the banks in Hong Kong and the People’s Bank of China (PBoC), and as such it provides the most important channel for renminbi to move from the mainland to Hong Kong.

Offshore banks can deal directly with onshore Chinese banks—called correspondent banks—in order to settle trades, but restrictions apply. Gaining access to offshore renminbi will be expensive due to liquidity.

“Banks are unlikely to go for the more expensive [offshore renminbi provided by offshore entities] in order to facilitate their trade finance business except for those that have already been committed to it. Banks could use their own [offshore renminbi] funds to support immediate client needs,” said Frances Cheung, Asia ex-Japan strategist for Crédit Agricole CIB in Hong Kong.

According to a Bloomberg report the HKMA said that it intends to draw down Rmb10 billion from a Rmb200 billion swap line with the PBoC to help any authorised banks that do not have enough access to offshore renminbi until the end of the year.

Arthur Yuen, the deputy chief executive of the HKMA, said that between the time the offshore trade settlement scheme started in July 2009 and September 10 this year, BoCHK bought Rmb4 billion of renminbi from the PBoC. That indicates that Rmb4 billion was bought in October to make up the Rmb8 billion set aside for settlement.

HSBC believes the market can expect some supply constraints to be felt for institutional demand that cannot be clearly proven to be trade-related. There is a strong desire from many to get hold and keep renminbi because of the strong likelihood it will appreciate in value.

“If the shortage proves to be trade driven, we expect Beijing to widen the [settlement] quota,” wrote Richard Yetsenga and Hongbin Qu, global head of emerging market FX strategy and Asian economist, respectively, in a HSBC research report.

“If not, once any unqualified use of the trade settlement has been identified and stamped out in the short run, we expect Beijing to continue with its longer term strategy for renminbi internationalisation.”